I’ve posted two articles so far on the proposed $15,000 Homebuyer Tax Credit:
The first outlines my initial discoveries…
My second outlines my deep digging…
A lot of posts around the web have talked about how the credit will get home purchases moving again, which it will. What they don’t say, however, is the net effect is likely to be limited. Home prices will not improve and existing home inventory for sale will increase!
The train of thought is pretty elementary. There are two groups of people: those who currently own a home and those who do not.
In the case of the former, the $15,000 credit might just be enough to get them off the fence to purchase a home. However, is it really that different than the $7,500 first time homebuyer credit that currently exists? Generally speaking, those without homes, that is renters, are recent graduates or those with lower incomes. Since the tax credit is limited to your income tax liability over the course of two years, they wouldn’t get the full $15,000 anyways. The math behind that is here.
Now let’s examine the case of those in homes, the group targeted by expanding the credit to all homebuyers. Let’s say, for example, there are 4 million existing homes in inventory for sale and 500,000 people decide they want to take advantage of the new credit. Thus there are 500,000 new buyers for the 4 million homes. Great, isn’t it!
But wait, those 500,000 people also have to put their homes up for sale - nobody is going to risk sitting on two homes in this economy, are they? Now there are 4.5 existing homes for sale equally offsetting the 500,000 increase in buyers. Did this really help the housing situation, or did it just shift the supply and demand curves?
Ultimately, this will not dramatically improve the housing market in terms of reducing existing inventory for sale or raising home prices, but it almost certainly will increase the volume of homes sold and for sale, benefiting none other than that realtors. They will prove to be the largest benefactor while sucking an estimated $38 billion out of the tax payer pockets in doing so.
{ 2 comments… read them below or add one }
There are also those that have previously owned a home but currently do not (e.g. someone who owned in a cheaper place, say Dallas, who now lives in LA or NYC where they cannot afford to buy so they rent). They would now be eligible for the credit under the Senate’s proposal. And there are recent grads, such as myself, that would be able to take full advantage of the $15,000 threshold.
Well, if this 15K credit passes as is.. It will help me big time. I make just under $95K a year.. Am 28 and looking to buy my first home after renting in L.A. for years. So the last $7500K credit was practically useless to me… so i sat on the sidelines.
This will help middle class first time homebuyers tremendously…. I know my salary is more UPPER middle class in most locations.. But in Los Angeles my income hardly affords me a 2-3 bedroom condo. This $15K credit may just tip the balances for me to step into this market. On the hunt for a $250K 3-bedroom luxury condo… and a 4.5% interest rate….If this comes to be… My monthly payments will be similar to what I pay to RENT a 1 bedroom apartment currently in Hollywood…
The question is do i put my life on hold… and miss out on the huge tax savings of owning and building equity in a home just because the L.A. market could drop another 20 percent over the next year or two? I’m planning on buying in the Valley.. Tarzana, Woodland Hills… areas that have been hit HARD already… 50 percent drops from 2006 highs in area.